Against a backdrop of economic uncertainty, challenging market conditions and evolving industry practices, it’s critical for insurance companies to focus on risk management more than ever before, according to Jeremy Rudin, Superintendent of Financial Institutions.
Speaking at KPMG LLP’s insurance issues conference in Toronto on Monday, Rudin said it’s important for industry players to constantly monitor all potential risk factors, and to have sufficient risk management capabilities and capital buffers in place to manage those risks.
“The future is uncertain,” he said. “We expect companies to do their own risk assessment — they need to measure their risks, they need to monitor their risks, they need to manage their risks. And, they need to be capitalized, so that if their predictions go wrong, and they experience losses, they can survive through plausible but severe losses and still serve their customers.”
Rudin highlighted three key risks and challenges currently facing the insurance industry:
1. Technology
Continuous advancements in technology create both challenges and opportunities for the insurance industry.
“Technological change could have a big impact on the industry as a whole, and on individual players,” Rudin said. “And, it could do so at a pace that’s very difficult to predict.”
In particular, Rudin said technological advancements could shake up distribution practices in the insurance industry. With online sales having become a prominent distribution channel in the retail industry and many other sectors, he said insurers face the challenge of keeping up with evolving consumer expectations.
“In other industries, we’ve seen technology change the sales model,” he said.
Online sales have begun to gain traction in the insurance industry, however Rudin said it has been slower to catch on, given the important role that personalized advice plays in the insurance sales process.
“In insurance, of course, the sales model is a very important aspect of the business — there is a lot of reliance on individual brokers or a captive sales force that is actively selling,” he said.
Nonetheless, he said there’s a possibility that online sales of insurance policies will become more pervasive over time.
2. Cyber risk
Along with advancing technology comes the growing risk of cyber breaches, Rudin said. Although insurance companies generally face less risk in this area compared to banks, given the nature of the information at risk, he urged insurers to treat cyber security as a key priority.
“It’s no less important,” he said. “Data integrity issues can very much damage the brand.”
The Office of the Superintendent of Financial Institutions has developed a self-assessment guide that insurance companies can use to gauge the scope of the risks they face in this area, Rudin said.
3. Economy
Economic uncertainty also represents an ongoing challenge for the industry, Rudin said. The prolonged period of low interest rates has presented a major challenge for life insurers, in particular, because of the long-term liabilities associated with the products in that industry. However, Rudin said the industry has done a good job of adapting to the low interest rate environment.
“I would say that overall, the Canadian life industry has adjusted well.”
More recent economic developments, including a decline in oil prices and in the Canadian dollar, have underscored the need for companies to continue to be prepared for sudden and unexpected changes in the economic environment, Rudin said.
“The recent change in oil prices is an object lesson in why we expect institutions to have a good risk management capability, to understand their risks enterprise-wide, and to be very well capitalized,” he said. “It reminds people, in a very useful way, that things can change — and they can change rapidly.”